HELOC vs Cash Out Refinance vs Stocks

[Jonathan Watson]

With the approach of our 4th child (!) this October, I decided it was high time I diversify my family's investments. So, I started down the path of learning about REI, and have been immersing myself in it for the last couple months. I've talked to agents, lenders, my CPA, turnkey companies--just trying to become familiar with the industry so i can make the best possible decision for my first investment property.

In short, I want to purchase investment properties for cash flow.  No flipping. No wholesaling.  Just purchasing properties to rent them out.

Here's my situation.

We have about 240-250k of equity in my home (which is currently on a 2.75 15yr fixed).  We've also been very fortunate with our stock portfolio and have significant amount of worth tied up in that too (though not as much as the equity we have in our house).

I have 3 options for funding our first investment property:

1. Do a cash out refinance and use the cash I'll get.
2. Get a HELOC and use that as necessary.
3. Sell stocks to fund the investment.
   

I feel fortunate that I have options in how to dive into REI, but I wanted to solicit some feedback on what the experts here think I ought to do.

[Robert Morse]

I must first qualify my response. I'm not a CPA, I don't play one on TV, and I didn't stay at a Holiday Inn Express last night! Having said that, the obvious answer is to use the vehicle that will give you the greatest ROI. No matter which you choose, the most critical is to set up an investment account, e.g. a Roth 401(k). One mistake that is often made is investing in one's own name. The tax penalties can be ferocious! (Apparently, the IRS thinks that if you are a successful investor, they're entitled to most of your profits!) Talk with a tax professional about the best vehicle for your situation. Since you want a buy-and-hold strategy, I suspect you're going to want to put everything into a trust, but again, check with the experts.

As for the HELOC vs cash out refi, I think, particularly in your case, the HELOC makes the most sense, for a few reasons: 1) You're not likely to get the terms that you currently have, 2) the closing costs on a refi are a lot steeper, 3) with a HELOC, you only pay interest on the money while it's in use.

As for the stock portfolio, that may be a great opportunity to turn it into a self-directed fund.

Best of luck!